WASHINGTON (Reuters) — A small Nebraska
state commission that has never considered a major oil pipeline route
could soon play a pivotal role in deciding the fate of the Keystone XL
pipeline, a project brimming with political risk for both the U.S. and
Canadian governments.

A court ruling this week reinstating the Nebraska Public Service
Commission's authority over TransCanada Corp's $5.4 billion project
from the Alberta oil sands has raised new questions about a
long-delayed project that Canada considers crucial to its economic
future.

As a result, Keystone XL may face several more months of uncertainty
while the state's judicial system finally decides who has the power
to approve its proposed path.

The commission could start its review once TransCanada submits an
application, but the company will likely wait to see whether the
lower court's ruling stands up against appeals.

If the commission does end up evaluating the pipeline's route, it
would open the door for more snags for the project.

"It's another round of approvals that gives the project opponents
another opportunity to challenge it in litigation or somewhere
else," said Lowell Rothschild, an attorney for Bracewell and
Giuliani who represents clients on environmental compliance issues.

The fresh uncertainty could lead to another pause in the Obama
administration's federal permitting process as well. The president,
who has the last word on whether the project can proceed, had been
expected to issue his decision as early as this spring. Now all bets
are off, even as Canada steps up pressure on the administration to
give its blessing.

UNTESTED REVIEW PROCESS

The commission first gained authority over oil pipeline routes in
Nebraska a little more than two years ago, just as Keystone — which
would deliver Canadian crude to U.S. Gulf refineries — was taking on
national significance.

But the commission, which has existed in one form or another for
more than a century, was cut out of the process in 2012 when the
state legislature passed a law putting the final decision on the
route in Nebraska Governor Dave Heineman's hands.

A state court decision on Wednesday restored the commission's
authority.

Unless that ruling is overturned or a new law passed, TransCanada
will have to submit an application to the commission for the
untested review process, which could take seven months or more to
complete.

The agency's five elected commissioners would take on the task of
deciding whether the Keystone route was in the public interest,
placing them in the middle of a political tug-of-war.

Opponents say the pipeline would exacerbate climate change by
supporting carbon-intensive development of oil sands crude.

Supporters in Congress and the energy industry say Keystone would
improve U.S. energy security and create thousands of jobs. They have
pressured the White House to speed up federal review of the project,
now in its fifth year.

For Canada's oil industry, the pipeline is considered key to
accessing the high-value refining market on the U.S. Gulf Coast,
where bitumen from the oil sands can compete against more expensive
heavy oil from Venezuela and Mexico.

Approval of the pipeline is viewed as critical to a further
expansion of oil sands production. With output now pressing against
the capacity of Canada's existing export pipelines, Keystone XL
could remove constraints that have made expensive rail shipments
popular with producers.

DELAYS AHEAD?

The Nebraska commission's regulations lay out a detailed process for
assessing impacts of the pipeline that includes at least one public
hearing.

State law gives the commission seven months to issue a decision on
an oil pipeline, though an extension to 12 months or more is
possible under certain circumstances.

Environmentalists, who were active in the commission's process for
developing the oil pipeline regulations, welcomed the move to the
panel that is generally viewed as apolitical.

"We think it's a much better process than the process that was
thrown out," said Ken Winston, the Nebraska policy advocate for the
Sierra Club, referring to the legislation, rejected by the court,
that put the decision in the hands of the Republican governor.

A potential roadblock that TransCanada would face during the
commission's process is that the agency will have to consider the
views of local counties and governments surrounding the route, some
of which oppose the pipeline's route over concerns about harm to
fragile ecosystems in the state.

A spokeswoman for Governor Heineman directed inquiries about the
commission to the state's attorney general office, which also
declined to comment.

SOME WORK DONE

While the agency would not look at the safety of the pipeline or the
risk of leaks, it would have to assess "intrusion" of pipeline
construction on natural resources and the economic and social
impacts of the project.

Nebraska law also requires that state agencies such as the
Department of Environmental Quality (DEQ) and the Department of
Natural Resources provide input on pipeline applications, and it
allows the commissioners to ask the agencies to submit reports
related to proposed projects.

Since the DEQ already released an environmental review of the
pipeline last year ahead of the governor's decision, the
commission's assessment could wrap up in seven months, said
Christine Tezak, an energy analyst with ClearView Energy Partners in
Washington.

The DEQ report found the pipeline would avoid the sensitive Sand
Hills region of the state and that construction of the project would
have "minimal" environmental impacts in the state.

"That substantial dry run would seem to help a
first-through-the-process project," Tezak said.

If the commission does wind up taking on the Keystone case, it would
likely have to hire outside contractors to help carry out the
review. The commission's natural gas department, which would handle
the Keystone application, has two people on staff full time.

Nebraska State Senator Jim Smith said he was not concerned about the
commission's ability to issue a decision on the project's route,
although he prefers that the state prevail in its appeal of the
overturned law.

"I don't think the Public Service Commission would have any problem
or difficulty with the review," Smith said.

Smith, a Republican, sponsored the legislation that gave authority
over Keystone to the governor and the state's environmental agency.

He said he introduced the bill because the commission was still
getting its regulations for oil pipeline routes in place.

The U.S. State Department last month issued an environmental impact
statement that found that approving Keystone XL would not unduly
worsen climate change.